There is natural phenomenon colloquially known as the ‘river of fog’ that fills the Grand Canyon every ten years with a dense cloud of impenetrable mist and fog. This occurrence is attributed to the unusual geographical event called ‘temperature inversion’. This year sees the publication of the new 2020 Incoterms (international commercial terms) or terms of trade from the International Chamber of Commerce. These terms are updated every ten years and the 2020 terms replace the 2010 version. Therefore, with the heightened awareness of the customs union(s), intra EU trade and the importance of assimilating EU centric businesses to the world of customs documentation and procedures ahead of Brexit, Incoterms are rightly basking in a renewed focus.
Simply put, Incoterms consist of several abbreviations designating the terms of trade upon which parties undertake the buying and selling of goods. They allocate the agreed risk that each party wishes to bear when goods move across frontiers. Two such examples of Incoterms are DAP (delivered at place) and FOB (free on board). Incoterms are grouped into E terms, F terms, C terms and D terms and each group gradually shifts risks and costs from the seller to the buyer.
Importantly, these terms do have a customs relevance; especially the Incoterm DDP (delivered duty paid). This particular term means that the seller bears all the risk up to the designated delivery point including meeting all import tax obligations.
DDP is an important and well-used term. However, it can be onerous for the seller especially if the seller has difficulty in meeting both the practical and monetary customs obligations in the country of arrival. It can also be costly and prevents overseas businesses from making use of certain benefits such as easily reclaiming import VAT. Some bigger buyers impose these terms on smaller sellers in contracts to minimise their own exposure. Additionally, DDP can also have an impact on the type of agent representation that has to be enacted and when using certain customs regimes and special procedures.
Ahead of the publication, many customs commentators were speculating on the potential 2020 changes – abolishing or splitting DDP, retiring such Incoterms as EXW (Ex works) or splitting and clarifying other F and C terms. However, the final publication update has produced subtle but welcome changes to clarify and improve the understanding for business.
Very briefly, these changes are:
- Changes to DAT (delivered at terminal) to DPU (delivery at place unloaded) – thus removing the confusing ‘terminal’ element.
- Changing the levels of insurance requirements between cost, insurance and freight (CIF) and carriage and insurance paid to (CIP) terms.
- Introducing clarification on free on board (FOB) and free carrier (FCA) terms.
- Allowing the buyer and seller to use their own means of transport if so desired in certain terms.
- Clarifying the recording and cost responsibility of security declarations.
- Clarifying costs to be allocated in each term to ensure transparency at each stage.
Using and understanding Incoterms and their importance in the negotiation of contracts is an important part of a company’s preparation for any outcome relating to Brexit. It would be wise on all cross-border transactions for businesses to consider how Incoterms can benefit and protect them. Such preparation may allow a torch to penetrate that other dense ‘river of fog’ that is proving harder to disperse.
For more information, please contact Simon Sutcliffe.
This article is taken from the latest edition of our Customs Digest newsletter, looking to help businesses and individuals keep up to date with the latest customs and excise duty regimes and issues. If you would like to receive future editions of this publication, please register on our insights page here.